Thomson Reuters aquires FXall as it aims to offer end-to-end solution, stay ahead of regs.
Thomson Reuters announced today that is acquiring FXall. Per the Thomson Reuters release, it “has entered into a definitive agreement to acquire 100 percent of the shares of FXall for $22 per share in cash.” A tender offer comes next, which is subject to standard regulatory approvals, but the FXall Board (including the principals in Technology Crossover Ventures, who collectively own approximately 32.5% of FXall’s outstanding shares) is unanimously resolved to recommend the deal to all shareholders and tender their shares into the offer. The move can be seen a number of ways and here are three:
1) It one-ups Bloomberg. This acquisition puts Thomson Reuters up a break in this set of the match with Bloomberg. Bloomberg is probably still up at least a set, reflecting its aggressive moves over the last few years to extend its dominance in the fixed income space to foreign exchange, where Reuters had been the traditional dominant player. Based on NeuGroup member discussions, Bloomberg was rising to the number 3 spot in multibank e-FX, if not number 2, behind FXall and 360-T. Some of this was due to price, but also due to the ease of having everything flow through ever-present Bloomberg terminal, which has swallowed share in the market information and analytics space. The FXall acquisition will put Thomson Reuters back in the leading game, but also prompt a countermove by Bloomberg that also may lead to further advancement in the e-FX space. It was only last week that FXall announced multibank options trading, which was long awaited–and, just a few weeks ago, algorithmic trading. Thomson Reuters cannot rest with its acquisition and will have to have FXall leading again in service offerings and innovation.
2) FXall can no longer be bank owned. This speaks to one of the reasons pointed to in FXall’s being slow to offer new products like options, too. According to its most recent 10-K, among FXall’s growth strategies were to grow its business by offering its clients additional products and features complementary to its existing suite of products, such as FX options. Additionally, it wanted to offer more pre- and post-trade services and workflow tools that it believed would interest to its clients. It also wanted to capitalize on opportunities related to regulatory reform, which would eventually require the centralized clearing of FX non-deliverable forwards (NDF) and FX options as well as execution through a regulated entity, such as a swap execution facility, or “SEF.” FXall wanted to become a SEF, seeing an opportunity to increase the products and services that it offered.
The problem is that many big banks – those under ever increasing regulatory scrutiny – have sizeable stakes in FXall’s business. The significance of being backed by banks is, of course, also matter of new regulatory and capital requirements facing banks.
“The regulatory environment in which we operate is subject to continual change. Changes in the regulatory environment, including as a result of the Dodd-Frank Act, could have a material adverse effect on our business, financial condition and results of operations and cash flows,” the company wrote in its 10k. “The legislative and regulatory environment in which we operate has undergone significant changes recently, and there may be future regulatory changes in our industry. The financial services industry in general has been subject to increasing regulatory oversight in recent years. The governmental bodies and self-regulatory organizations that regulate our business have proposed and may consider additional legislative and regulatory initiatives and may adopt new or revised laws and regulations. As a result, in the future, we may become subject to new regulations that may affect the way in which we conduct our business and may make our business less profitable. Changes in the interpretation or enforcement of existing laws and regulations by those entities may also adversely affect our business…” It also stated that, “Since the CFTC has not issued many of the final rulemakings under Title VII, including the rulemaking to further define the definition of a swap and rulemakings governing SEFs, it is difficult to predict all of the effects the Dodd-Frank Act may have on us.”
Basically, FXall needed access to more capital and access to capital from non-banks. For one, banks are needing to set aside more capital to support trading operations and two, if FXall needs to become an SEF, as it says it may need to, it cannot be more than 25 percent owned by banks. But, of course, this is also the reason FXall did an IPO last February to free itself from bank ownership. This leads us to the final way to read this, namely.
3) The IPO last February failed to put FXall on a path to capital that it felt it needed to pursue its growth strategies and mitigate its regulatory risk. The IPO does give us clearer insight into the above, thanks to its 10-K and the offering document it is based on, but it did not deliver, apparently, what FXall sees it needed strategically (understandable given current state of the stock market). It is not clear to what extent the IPO succeeded in clearing the bank-ownership hurdle, but since Thomson-Reuters paid $22 per share after IPOing at $12 and $15.70 on the Friday before the announcement, FXall can certainly succeed in doing that now and maybe have some of the $625mn left over to become an SEF–or at least the backing of Thomson Reuters to attempt to do so.
In the end, the IPO and sale to Thomson Reuters are part of the same trend that will see more and more of FX and OTC derivatives trading migrating from the ownership of banks to entities regulated in such a way as to make the economics of these businesses more viable.